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German Tax Authorities Issue Guidance for Group Names, Royalty Fees

Germany’s Finance Ministry (BMF) has issued guidelines clarifying when a parent company
can charge tax-deductible royalty fees to subsidiaries for trademark licenses, in
light of a ruling from the country’s top tax court, the Federal Finance Court (BFH).

The BMF said it aims to clarify the distinction between a company’s “mere”
use of a group name—where a license fee wouldn’t be tax deductible—and situations
where a parent company could charge a subsidiary for a tax-deductible license fee.

The
April 7 guidance is needed because practitioners can sometimes find it challenging to differentiate
between the two scenarios, said attorneys.

“It’s quite a thin line, so the advice is fairly technical,” Thomas Busching, a tax
partner at Squire Patton Boggs in Frankfurt, told Bloomberg BNA in an April 11 telephone
interview.

“On the one hand, they say a license fee for a group name or a company name is not
deductible, but the tax authorities also recognize that they may also be identical
with a trademark,” he added. “So where do you draw the line?”

Tax Court Confirms State of Play

The BFH confirmed in its
Jan. 21, 2016, ruling an earlier decision from 2000 that dealt with the question of tax-deductible royalty
fees for the use of company names, said attorneys.

“Back then, the BFH already confirmed the principle that when a subsidiary is simply
and exclusively using the brand of the parent in its company name, then the parent
cannot charge a fee that would be recognized as a tax expense of the subsidiary,”
Bodo Bender, a tax partner at White & Case in Frankfurt, told Bloomberg BNA in an
April 12 telephone interview.

“It’s only possible to charge a fee when there is some active economic use of the
brand or trademark—such as manufacturing products or using the brand for services
in the relevant foreign jurisdiction,”
he added.

But due to changes that were made to Section 1 of Germany’s Foreign Tax Act (AStG)
in the meantime, questions were raised as to whether this ruling would still apply
under the revised Foreign Tax Act.

“Essentially, the BFH confirmed this,” said Bender. “And now the BMF said in its decree
that it will continue to apply the principles established by the BFH for all open
cases, also under the revised AStG.”

The court’s ruling—and by turn BMF decree—also applies to German subsidiaries of foreign
companies as well as German parent companies with subsidiaries abroad, he added.

Distribution Not Tax Deductible

The advice laid out in the Finance Ministry’s decree should help companies interpret
the finance court’s verdict on this matter, said attorneys.

“A couple of the guidelines are pretty practical,” said Busching. “This name or the
trademark needs to have some sort of value—and a third-party would be willing to pay
for the use of that trademark for it to be tax deductible.”

The BMF explains if a company has a German subsidiary that only serves as a distributor
of products or services, the parent company cannot charge a tax-deductible license
fee for the use of the company name.

“Apple would be a wonderful example,” said Busching. “Apple doesn’t have any kind
of manufacturing here in Germany, so anything they do here is basically just distribution.”

As a result, the license fee for the use of the Apple trademark wouldn’t be tax deductible.

Instead, tax authorities said the use of a brand name in a situation like this would
be factored into the price of the product the German subsidiary pays to the US.

“So German tax authorities wouldn’t allow a separate fee,” said Busching. “Because
that fee for the use of the trademark is already factored into the general price for
the distribution of the product.”

Exceptions for Manufacturing, Economic Activity

On the other hand, subsidiaries that use a brand name for more entrepreneurial purposes
like manufacturing can be charged a tax-deductible fee, the BMF said.

“If you use it for manufacturing or service activities—if you use the brand or intellectual
property for some further economic and entrepreneurial activity—then a fee can and
should be charged,” Bender said.

But determining which of these situations applies isn’t always so clear cut, Bender
added.

“It’s a question of definitions—what is a service activity and what is just a distribution
activity?” he said. “It’s easy when you distribute goods produced by another group
entity, but if you ‘distribute’
know-how, at the same time you often render services in relation to this know-how.”

Then it becomes even more important how companies apply transfer pricing and which
method they apply within the group, he added.

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